A tightening of municipal bond yields in various pockets of the secondary market highlighted an otherwise quiet trading session Monday.
A return to normal levels of primary issuance, robust ratios to Treasuries and other positive factors positioned the municipal market for a strong week, traders noted.
As market participants settled back into their desks after the holiday week, they sifted through the secondary for high grades amid the supply overhang.
Tax-exempt yields fell modestly beyond the short end of the curve. The belly of the yield curve, in particular, saw solid activity, a trader in North Carolina said.
“Certainly, in the intermediate part of the curve, we’ve had some solid trading today,” he said. “We’ve definitely seen munis performing and credits starting to tighten from where they were over the last few weeks. I wouldn’t say everybody’s jumping on board, but for a Monday, we’re certainly seeing some good performance, good follow-through from late last week.”
Retail investors bought paper early on the day, picking away at some of the longer bonds, a trader in Florida added.
But there was also noticeable activity from the institutional crowd, which compressed spreads.
Some activity in the secondary raised eyebrows.
Louisiana gas and fuels tax bonds traded closer to where the state’s general obligation credits trade. The deal arrived back in May at plus-40 basis points to most recent Louisiana GO deal, the trader said.
“But there have been trades inside of plus-30 [basis points] now,” he said. “And Louisiana gas seems to be trading on top of that, or flat to that, which is definitely an eye-opener, in, call it the 10-year area.”
Tax-exempt yields on Monday firmed across all but the front end of the curve, according to the Municipal Market Data scale. They were steady through two years.
Yields from three to 10 years ended the day one to two basis points lower. Beyond 10 years, they dropped three basis points.
The benchmark 10-year triple-A fell two basis points in Monday’s session to 1.80%. The muni long bond clipped three basis points on the day 3.09%. The two-year started the week at 0.32%, hovering for the 26th straight session.
Treasury yields continue to creep downward, and narrowly outperformed on the day as they did.
The benchmark 10-year yield slipped three basis points to 1.52%. The 30-year yield fell four basis points to 2.62%. The two-year slipped one basis point to 0.27%.
The low yields have investors buying bonds through gritted teeth, a trader in New York said.
“Clients are going to be forced into buying whether they like it or not,” he said. “They don’t like it — they’d rather buy when things are cheap. But they’re flush with cash.”
There is definitely some overhang in the muni secondary market from deals that arrived a few weeks ago, the trader from North Carolina said. And that has piqued the interest of some investors.
“You’re seeing some pretty good tightening. The deals that sold two weeks ago, those have tightened in,” the trader said. “A lot of bonds, on good high-grade stuff, have tightened 10 to 15 basis points. As that continues, guys will probably start looking, as there’s value from credit to credit. And if you start to see some of these high-grades trade, that’ll be a pretty good sign for the market.”
Muni ratios to Treasuries continue to look attractive, despite the low nominal levels, the trader in North Carolina said. Ratios will probably remain that way, he added.
Ratios ended Monday above 117% across the curve, according to MMD numbers. The 10-year ratio stood at 118%. For the past month, it averaged about 116%.
The two-year and 30-year recorded ratios of 119% and 118%, respectively. Over the same period, the 30-year ratio has averaged approximately 117%.
The two-year has averaged around 109%.
“I don’t see any reversion to the mean anytime soon, especially if Treasuries continue to go lower in yield,” the trader from North Carolina said. “It’ll probably be a lagging effect on munis. I would anticipate us holding around these levels, certainly if supply is not a factor.”
Muni supply should approach pre-Independence Day celebration levels this week, after posting particularly weak issuance numbers last week due to the holiday falling mid-week.
Industry estimates anticipate $7.07 billion should reach the market. That compares with a meager $105.7 million of new supply during the holiday week.
Most of the larger deals are expected to arrive on Tuesday.
On Monday, Bank of America Merrill Lynch priced for retail $317.3 million of the Central Puget Sound Regional Transit Authority sales tax and motor vehicle excise tax refunding bonds and sales tax refunding bonds, in two series.
Bonds in the first series, $216.4 million of sales tax and motor vehicle excise tax refunding bonds, are rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s. Yields range from 0.34% with a 3.00% coupon in 2014 to 0.67% with a 3.00% coupon in 2016.
Debt maturing in 2013 is offered in a sealed bid. Credits maturing in 2017 through 2028 are not offered to retail. The bonds are callable at par in 2022.
Bonds in the second series, $100.9 million of sales tax refunding bonds, are rated Aa2 by Moody’s and triple-A by Standard & Poor’s. Yields range from 0.81% with a 4.00% coupon in 2016 through 3.37% with a 3.25% coupon in 2030. The bonds are callable at par in 2022.
In the competitive side of the market, TD Securities won $90 million of Dekalb County, Ga., School District tax anticipation notes. The notes mature on Dec. 28; they are priced to yield at 0.56%.
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